After the introduction of the Hong Kong Stablecoin Ordinance, I pointed out in articles such as “The Current Method of Issuing HKD Stablecoins Needs Restructuring” that there were potential flaws in the current issuance mechanism, and systematically pointed out the path to a solution. Some have argued that the method I proposed is nothing more than “blockchaining” the linked exchange rate system of the Hong Kong dollar, much in the same way as the issuance of the Central Bank Digital Currency (CBDC). The purpose of this article is to respond to this skepticism and to clarify the essential differences between the two.
Core point: The central bank issues the base currency M0, while the Hong Kong dollar stabilized currency belongs to the broad currency M2. CBDC is issued by the central bank, while the Hong Kong dollar is issued by commercial banks. There are fundamental differences between the two in terms of credit base, circulation mechanism and value stabilization.
I. Difference between HKD and CBDC
1. Different issuers
– CBDC is issued directly by a central bank (e.g., the People’s Bank of China), is a liability of the central bank, and is a legal tender.
– The Hong Kong Dollar (HKD), on the other hand, is issued by three commercial banks: HSBC (HSBC), Standard Chartered (SCB) and Bank of China (Hong Kong) (BOCHK). The Hong Kong Monetary Authority (HKMA) only issues coins and commemorative banknotes of $10 and below.
2. Different credit endorsement and support mechanisms
– CBDC is backed by the credit of the state and has a legal status equivalent to cash (M0), without the need for asset collateralization.
– The Hong Kong dollar relies on the linked exchange rate system, and note-issuing banks are required to pay US$1 as reserves to the HKMA for every HK$7.8 issued. Its credit is based on the triple backing of US dollar reserves, the credit of the HKMA and the credit of the note-issuing banks.
3. The path of money creation is different
– CBDC follows the two-tier operation system of “central bank → commercial bank → public”.
– HKD is generated by “commercial banks collateralize USD → create deposit money → then amplify money volume through credit”, which is essentially market-driven money creation.
4. Currency forms and technology bases are different
– CBDC is based on blockchain or distributed ledger technology (DLT) and is a centralized system that supports controlled anonymity, programmability and offline transactions.
– The Hong Kong Dollar (HKD) coexists with banknotes and deposits, with banknotes issued by commercial banks and deposits accounting for more than 90% of the supply, and circulation is realized through electronic bookkeeping in the banking system.
II. Similarities and Differences between HKD Stablecoin and CBDC
Although both may adopt blockchain as the technological underpinning, their issuance mechanisms are fundamentally different:
– HKD Stablecoin is issued by licensed commercial banks or institutions, based on the equivalent value of US dollar reserves and the linked exchange rate system, with a market-based issuance process and credit reliance on reserve assets.
– CBDC, on the other hand, is directly issued and credit backed by the central bank, and is a digital form of national fiat currency.
III. The Hong Kong dollar issuance model is the “ancestor” of the fiat stabilized coins
The original concept of cryptocurrency was proposed by David Chaum in 1982, and it was not until 1989 that he invented DigiCash, from which Satoshi Nakamoto derived the term “cash” for his Bitcoin system. The term “cash” is derived from this.
While cryptocurrencies were still in their infancy, the linked exchange rate system has been a mature system for 42 years, having operated since 1983, and its market-based, decentralized design embodies the blockchain spirit of “not relying on a single authority. Its founder, Brock Pierce, has publicly stated that he “borrowed the Hong Kong banknote-issuing bank model”.
It can be said that the Hong Kong dollar issuance mechanism is the institutional pioneer of stablecoins, and its success stems from institutional design rather than technology, and has not been surpassed to date. The centralized regulation and management of the Hong Kong dollar has been adopted by USDT, while the blockchain spirit of “not relying on a single authority” is not reflected in USDT. USDT can be regarded as a neutered version of the HKD issuance method, which is not suitable for the issuance of most sovereign stablecoins.
IV. Reasonable Issuance Method of Hong Kong Dollar Stable Coin
If the underlying technology of Hong Kong Dollar issuance is replaced by blockchain, it will form “Hong Kong Dollar Stable Coin”. This model can effectively solve the three core problems of stablecoin issuance: lack of bailout, opaque credit and confusing naming, and avoid the risk of “stacking leverage” by repeatedly issuing stablecoins on top of anchored coins.
Under this model, the Hong Kong dollar and the Hong Kong dollar stablecoin circulate in parallel, without the worry of leverage. Even if the exchange rate of the Hong Kong dollar or the stable currency deviates from the range of HK$7.75-7.85 per US dollar, it can be adjusted independently through the mechanism.
Bengt Holmström, the Nobel Prize winner in economics, pointed out in Collateralization and Liquidity (2023) that “the dual collateral-arbitrage mechanism of Hong Kong’s linked exchange rate system is a Pareto-optimal solution to currency crises”. Adopting the linked exchange rate system and implementing the Hong Kong Dollar Stabilized Coin with blockchain is the current optimal solution for the Hong Kong Dollar Stabilized Coin.
V. HKMA’s Timely Response and Unfinished Business
I published the article “Will Introduction of the Stablecoin Act Trigger a Financial Tsunami?” on July 21 pointing out the three major risks of stablecoin issuance, I did not go into details for those who are interested. It implies that the Hong Kong dollar stablecoin is the windfall of the financial tsunami.
The HKMA introduced the “real name penetration + data retention + T+1 redemption” policy on August 1, which triggered market controversy but effectively plugged most of the loopholes of systemic risk. They are good at the details of implementation and there is still room for improvement at the strategic level. The HKD mechanism is a step above the USDT mechanism, so why does the HKMA have to settle for second best? Does it need to follow the US? Don’t you know that Sir George Pang is the originator?
Sir John Henry Bremridge the brilliant architect of Hong Kong’s linked exchange rate
If the HKMA does not respond in time, I had planned to write an article entitled “Besant Reaping Hong Kong: The Complete Collapse of the HKD” to analyze the potential crisis in depth. This shows that the design of financial systems and mechanisms is far more important than the technology itself.
If you are interested in “Bessent Reaping Hong Kong: The Complete Collapse of the HKD”, you can log on to the Chainless website, and I will write this article after the download of the Chainless platform reaches 3,000 people within 10 days from August 20th. Although some of the loopholes have been plugged, it is still dry and creative and will be very inspiring. Besant couldn’t have done this, but the cryptocurrency guys can’t say the same. Certainly not easy for the HKD to crash.
VI. RECOMMENDED READING
If you wish to learn more about the discussion, you are welcome to read the following articles:
1. “Will Introduction of the Stablecoin Act Trigger a Financial Tsunami?“
2. “Stablecoins – America’s Path to Defending Financial Hegemony“
3. “When Stablecoins Tear Down Banks’ Interest Margin Moats“
4. “The Current Method of Issuing HKD Stablecoins Needs Restructuring“
5. “Problems with Cryptocurrency Regulation (Part 1 – 4)“
6. “Conceptual Confusion Caused by Hong Kong’s Stablecoin Regulations and Clarification Thereof“
